Vietnam will raise electricity prices by 5 percent starting Tuesday, as the country moves to encourage development in the power sector and keep up with increasing energy demand.

Power tariffs will rise to an average VND1,304 (6 cents) per kilowatt hour from the current average of 1,242 dong, Vietnam Electricity said on its website Monday.

The increase, the first under new regulations which came into force June 1, will help "attract foreign investment into power projects" and "encourage efficient and economical use of energy," the state-run utility also known as EVN said in the statement.

The price adjustment may help ease financial pressure at EVN, which often sells its power at steep discounts to the cost of generation, and encourage independent power producers to build generation facilities.

The company may lose VND3.54 trillion ($168 million) from producing electricity this year, Minister of Finance Vuong Dinh Hue told the National Assembly in Hanoi on Nov. 24.

"It's necessary in order to put a regime in place that will provide sufficient growth in the sector to power Vietnam's increasing consumption and industrialization," Jonathan Pincus, a Ho Chi Minh City-based economist with the Vietnam Program at the Harvard Kennedy School, said ahead of the price increase.

According to the regulations which became effective Jun.1, EVN is allowed to raise power prices every three months based on market conditions.

The utility asked the Ministry of Industry and Trade to increase prices by as much as 13 percent from November, Tien Phong newspaper reported, citing an unidentified source.

"Chronic" power shortages are affecting growth in Vietnam's agriculture, industry and services industries, according to the World Bank.

The country needs to more than double installed generation capacity to 39 gigawatts by 2020 from about 16 gigawatts at the end of 2008, it said.

Subsidies have helped keep Vietnam's power prices the lowest among members in the Association of Southeast Asian Nations, or Asean, according to the European Chamber of Commerce in Vietnam.

"Vietnam has to adjust energy prices to regional levels: only higher but realistic prices will enable businesses to operate generating surpluses to finance capital expenditure and thus allow these to operate on a commercially viable and sustainable level," EuroCham said in its 2012 White Book of trade and investment issues and recommendations, issued Dec. 1.

Inflation challenge

The rise in prices may challenge government measures to reduce annual inflation to about 18 percent by year-end. A record 15.3 percent rise in power prices in March, the last time tariffs were adjusted, contributed to an acceleration in annual inflation to 23.02 percent in June, the highest since November 2008. Annual inflation stood at 19.8 percent in November.

"I don't think inflation is a good reason not to bring things in line," said Pincus. "Essentially because they need to arrive at a regime that will enable them to really grow, to increase the supply of power very quickly. That's what they need."